Slovenian Approach to EMU Boštjan Jazbec Member of the Governing Board The views expressed herein are those of the author and not necessarily those of.

Slovenian Approach to EMUSlovenian Approach to EMU

Boštjan JazbecMember of the Governing Board

The views expressed herein are those of the author and not necessarily those of the Bank of Slovenia.

ContentsContents

• Macroeconomic Stabilization and Transition• Macroeconomic Perfomance• Maastricht Criteria• Entry to ERM2 and Adoption of Euro• Conclusions

Macroeconomic Stabilization and Macroeconomic Stabilization and TransitionTransition

• Better initial conditions than in other transition economies• Money-based stabilization program• Rehabilitation of the banking sector• Sound macroeconomic performance• Inflation

GDP per capitaGDP per capita

GDP per capita (EU(12) = 100, at PPS, 2001, in %)

198,0 119,1 118,9 112,6 106,8 105,1 105,0 104,5 104,2 102,2 100,2 82,6 73,2 57,5 51,2 47,9 39,9

69,1

100

100,4

0

20

40

60

80

100

120

140

160

180

200

Lux

embo

urg

Den

mar

k

Irel

and

Aus

tria

Net

herla

nds

Bel

gium

Finl

and

Ital

y

Ger

man

y

Swed

en

Fran

ce

EU

15

Uni

ted

Kig

dom

Eur

o ar

ea

Spai

n

Por

tuga

l

Slov

enia

Gre

ece

Cze

ch R

epub

lic

Hun

gary

Slov

akia

Pol

and

113,9113,9 68,3

Openness Openness (exports and imports in % GDP)(exports and imports in % GDP)

Export and import shares in GDP (2001; in %)

287,1 181,6 167,2 125,3 84,8 84,6 72,9 71,7 68,3 56,6 54,973,1

120,5

54,361,5

70,7

0

50

100

150

200

250

300

Lux

embo

urg

Irel

and

Bel

gium

Net

herla

nds

Slov

enia

Aus

tria

Den

mar

k

Swed

en

Eur

o ar

ea

Por

tuga

l

Finl

and

EU

15

Ger

man

y

Spai

n

Uni

ted

Kin

gdom Ital

y

Fran

ce

Gre

ece

104,9 52,5

Foreign Trade with EU Foreign Trade with EU (in % of export and import, 2001)(in % of export and import, 2001)

76,9 72,9 69,6 67,1 65,7 64,3 59,4 59,3 55,866,4 55,0

61,061,7

55,358,90

10

20

30

40

50

60

70

80

Por

tuga

l

Bel

gium

,L

uxem

bour

g

Spai

n

Den

mar

k

Aus

tria

Net

herla

nds

Fran

ce

Slov

enia

EU

Swed

en

Irel

and

Finl

and

Ital

y

Ger

man

y

Gre

ece

Government DeficitGovernment Deficit

Government deficit (% GDP, 2002)

4.7 2.6 1.9 1.2 0.0

-0.1 -0.1 -0.6 -1.2 -1.4 -2.2 -2.7 -3.6 -4.2 -6.5

-3.0

-9.1-1.1 -3.1-2.3

-1.8

-10-9-8-7-6-5-4-3-2-1012345

Fin

land

Lux

embo

urg

Den

mar

k

Sw

eden

Bel

gium

Spa

in

Irel

and

Aus

tria

Net

herla

nds

Gre

ece

Uni

ted

Kin

gdom

Slo

veni

a

Eur

o ar

ea

Ital

y

Por

tuga

l

Con

verg

ence

crit

.

Fra

nce

Ger

man

y

Pol

and

Cze

ch R

epub

lic

Hun

gary

Government DeficitGovernment Deficit

Government balance (% BDP; 2001, ESA 95)

6,1 5,2 0,9 0,6 0,0

-0,3 -1,5 -1,6 -4,2

0,6

-1,5-0,9

-2,8-2,6

-2,8

-5

0

5

10

Lux

embo

urg

Finl

and

Irel

and

Bel

gium

Aus

tria

Net

herl

ands

Spai

n

EU

15

Gre

ece

Fran

ce

Eur

o ar

ea

Ital

y

Slov

enia

Ger

man

y

Por

tuga

l

Public Debt Public Debt (% GDP; ESA95)(% GDP; ESA95)

Public debt (% GDP; 2001)

5,6 36,4 39,1 43,4 44,7 52,8 55,5 56,6 57,1 57,3 109,8107,069,2

63,1

33,6

107,663,259,50

20

40

60

80

100

120

Lux

embo

urg

Slov

enia

Irel

and

Uni

ted

Kin

gdom

Finl

and

Den

mar

k

Net

herl

ands

Por

tuga

l

Swed

en

Spai

n

Fran

ce

Ger

man

y

EU

15

Aus

tria

Eur

o ar

ea

Gre

ece

Bel

gium Ital

y

Price LevelPrice Level

Price level (EU(12) = 100, 2001, in %)

127,5 116,4 115,3 113,1 113,1 112,0 105,3 95,3 90,9 76,5 50,5 42,1 35,8109,8

100,0

42,1

66,3

85,40

20

40

60

80

100

120

140

Fin

land

Irel

and

Lux

embo

urg

Ger

man

y

Fra

nce

Bel

gium

Aus

tria

Net

herla

nds

Eur

o ar

ea

Ital

y

Spa

in

Gre

ece

Por

tuga

l

Slo

veni

a

Pol

and

Cze

ch R

epub

lic

Hun

gary

Slo

vaki

a

Relative Price ConvergenceRelative Price Convergence

Y-on-Y Final Quarter InflationY-on-Y Final Quarter Inflation

Maastricht CriteriaMaastricht Criteria

Synchronization of Business CyclesSynchronization of Business Cycles

GDP Composition by ActivityGDP Composition by Activity

Financial SectorFinancial Sector

Banking Sector by Total AssetsBanking Sector by Total Assets

Slovenia Slovenia vs.vs. Greece Greece vs.vs. PortugalPortugal

Disinflation Trend in SloveniaDisinflation Trend in Slovenia

The disinflation trend displays a breaks due to a combination of shocks in 1999: introduction of the VAT, demand boom, oil shock.

0

5

10

15

20

25

30

1994 1996 1998 2000 2002 2004

inflation (SA) stylized inflation trend

Exchange Rate Pass-ThroughExchange Rate Pass-Through

0

5

10

15

20

25

30

1994

1995

1996

1997

1998

1999

2000

2001

CPI DEM/SIT Poly. (CPI) Poly. (DEM/SIT)

ERM2 - Why as Early as Possible?ERM2 - Why as Early as Possible?

• Are there any reasons to wait?• Can small open economy run independent monetary policy?• Sound macroeconomic performance

ERM2 RisksERM2 Risks

• Capital inflows entail risks of volatility and exchange rate pressures

• Credit demand and booms:– low interest rates, demand boom and falling saving ratios can produce

overheating, CA deficit and asset price bubbles.

• Balassa-Samuelson effect may generate inconsistencies between the inflation and exchange rate criteria. – Estimates for Slovenia range between 1 and 1.5%.

ERM2 Policy MixERM2 Policy Mix

Joint program between BoS and the Slovenian Government from Nov. 2003.

• Monetary policy: ER management in line with the ERM2 criterion. BoS has acquired experience and designed its instruments to stabilize the ER movements.

• Fiscal measures: low fiscal deficits, counter-cyclical spending, reduced rigidities and formula-driven social transfers, buffer stock relative to the Stability and Growth Pact (SGP).

• Wage and price flexibility needed to absorb asymmetric shocks (progressive deindexation).

• Synchronization of activity with euro area implies a consistency with the ECB stance.

• Financial market supervision

• Appropriate central parity

ConclusionsConclusions

Wish us all the best.

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